Deal reveals another Enron scheme

Charges against former exec detail partnerships

By

LisaSanders

HOUSTON (CBS.MW) -- Federal charges against former Enron executive Michael Kopper reveal new details about the off-balance-sheet shenanigans that brought down the energy merchant, including the existence of yet another set of shady partnerships.

Kopper's guilty plea on Wednesday (see full story) caps the first stage of an investigation, which began after Enron wrote off $1 billion in bad investments and reduced its equity by $1.2 billion because of "certain related-party transactions" in the third quarter of 2001.

Those "related" parties turned out to be Enron Chief Financial Officer Andy Fastow and several others, including Kopper. The company used off-balance sheet partnerships to hide debt and losses, while Kopper, and his boss, Fastow, benefited handsomely.

The Justice Department's criminal filing detailed conspiracy to commit money laundering and wire fraud charges against Kopper. He pled guilty and agreed to cooperate with prosecutors as they pursue Fastow. He faces up to 15 years in prison.

In Wednesday's filing, the Justice Department said that Fastow (who isn't named but is referred to only as "Enron's CFO"), Kopper and others "devised a scheme to defraud Enron and its shareholders by enriching themselves through the use of special purpose entities."

Kopper also settled with the Securities and Exchange Commission, agreeing to give back $12 million in ill-gotten profits and never again be a corporate officer of a public company.

The special-purpose entities helped Enron
ENRNQ
artificially inflate its balance sheet and led to handsome profits for Fastow and Kopper.

Some of the SPEs broke two rules. First, the profits for Fastow and Kopper presented a conflict of interest. But the more important impact on stockholders was that they kept a majority of company debt off the books, making Enron look healthier than it actually was.

In fact, the federal charges say, some of the partnerships should have remained on Enron's books because they didn't meet accounting standards for being kept separate. Those standards require that outside parties with money at risk own at least 3 percent of the partnership.

RADR, Chewco and LJM

In the one arrangement that had not been disclosed earlier, Kopper and Fastow purchased an interest in several California wind farms from an Enron subsidiary. Enron, which was in the process of purchasing a utility in Oregon, would lose economic benefits granted to alternative energy facilities unless it sold those interests.

So Kopper and Fastow created two special entities known as RADR and funded them with $16.4 million from an Enron subsidiary. Rather than obtain the minimum 3 percent, independent funding, Kopper and Fastow got money from their friends. From August 1997 to July 2000, RADR paid about $2.7 million to the two and their friends.

In another instance, Enron formed the Chewco entity to buy out the interest held by California's public-employee retirement system in a joint venture known as JEDI. Fastow wanted to become the general partner of JEDI but backed out and substituted Kopper when it became apparent that Enron would have to publicly disclose his role, according to prosecutors.

Chewco never received the 3 percent outside funding it should have had for off-balance sheet treatment. Kopper and Fastow shared management fees before selling the limited partnership interest to Enron for $35 million. Kopper and his domestic partner received $3 million after the sale, the complaint says.

The Justice Department also cited LJM Cayman -- the initials stand for Fastow's wife and kids. The partnership's two limited partners were Credit Suisse First Boston and National Westminster Bank. Kopper and three bankers from NatWest convinced Enron to pay $20 million for NatWest's interest. Prosecutors say they took $19 million and paid NatWest $1 million.

From the proceeds, Kopper took $4.5 million, a foundation in the name of the Fastow family got $4.5 million, and the rest went to four Enron employees and another person.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.